Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.
Last week’s “fiscal cliff” drama may seem old news by now. You watched or read about the back and forth in Congress and maybe even studied the main points our lawmakers approved.
But here’s a scorecard on what the deal means for those of us trying to keep our family or business finances in check or wanting to plan our investments. Let’s start with the good stuff (depending on your point of view, of course):
The (mostly) positives
– The bottom line is Congress finally passed legislation to avoid massive tax hikes and deep government spending cuts, which almost certainly would have triggered another recession.
– An estimated 90 percent of the “new tax revenue” to be collected by our government this year will come from families who earn $1 million or more. Of course, these high-income folks — far less than 1 percent of the population — don’t like this deal at all.
– The patch to the alternative minimum tax is made permanent, with new provisions for future inflation. Without this fix, more than 30 million families would have been hit with an added tax, averaging about $3,700.
– The mortgage interest deduction survives, continuing a break for homeowners as well as an inducement for others to buy a home.
– Keeping tax relief for mortgage debt forgiveness also is very positive for the housing market. Distressed sellers’ forgiven debt is not counted as taxable income when executing a short sale, which helps the housing market continue to clear its inventory and recover from its crash.
– The fiscal cliff deal should boost consumer confidence, which should lift the stock market, including your 401(k)s and IRAs.
The (generally) negatives
– Expiration of the payroll tax break will result in a 2 percent hike on the first $113,700 in income for all workers – an average of about $200 a month if you are earning north of $100,000.
– Even with the approved legislation, that 2 percent payroll tax hike will be a material headwind for the economy, contributing to an estimated 1 percent economic drag this year. Essentially the extra $100 to $200 out of your pocket each month in new taxes won’t get “spent” at Target or Kroger, so it’s taken away from overall economic activity.
– If your income goes above $250,000, expect the tax rate on stock dividends to exceed the current 15 percent level. That’s because each extra dollar of investment income — including dividends and long-term capital gains — is subject to the 15 percent rate, plus a 3.8 percent surcharge under the Affordable Care Act, aka Obamacare, for a total levy of 18.8 percent.
– If your adjusted gross income exceeds the new thresholds of $400,000 for individuals and $450,000 for couples, you will pay a new 20 percent rate. Add the 3.8 percent Obamacare surcharge and you are now at 23.8 percent.
(Definitely) depends on whose ox is being gored
– Marginal income tax rates — 10, 15, 25, 28, 33 and 35 percent — are retained, but a new top rate of 39.6 percent will be imposed on taxable income exceeding the $400,000/$450,000 thresholds.
Keep in mind the upsides to the fiscal cliff deal may be short-lived as Congress faces a deadline in just a few weeks to raise the debt ceiling. This next debate about our nation’s money woes might make the recent fight look like a garden party.
Do you love the deal’s outcome, or hate it?
How has your personal scorecard changed from the fiscal cliff skirmish? And how do you think you’ll be affected by the debt ceiling debate?
– Wes Moss, for AJC Atlanta Bargain Hunter blog